Why Impact Investing is Gaining Traction Among Experienced Investors

Over the past decade, impact investing has evolved from a niche approach into a mainstream investment strategy. Investors are increasingly incorporating impact investing into their portfolios to generate positive environmental and social change, while also achieving attractive financial returns. This growing trend is particularly notable as investors seek new ways to diversify and align their portfolios with values-driven goals.

Once seen primarily as a philanthropic effort, impact investing is now recognized as a practical way to drive measurable social or environmental outcomes while achieving solid returns. The sector has grown significantly, with assets under management in impact investments reaching between $715 billion and $2.1 trillion in 2020. This growth comes on the heels of the United Nations recognizing impact investing as part of its Sustainable Development Goals (SDGs), further cementing its role as a key investment strategy.

The Rise of Impact Investing: A Mainstream Opportunity

In the past, impact investing was associated with investors focused solely on making a difference, often at the expense of financial gain. However, this notion has been dispelled, as many investors now see the potential for both positive impact and financial success. The emergence of new, high-growth companies addressing pressing environmental and social issues has shown that impact investments can deliver market-rate, or even above-market, returns.

Industries such as clean energy, sustainable housing, and social justice have benefitted from impact investments, with companies like QikServe, which provides digital ordering platforms to the hospitality industry, and CoreHaus, a modular housing builder, gaining traction. These businesses have not only made significant strides in their respective sectors but also demonstrated the broader impact of responsible investing.

More Opportunities for Impact Investors

The range of opportunities for impact investors has expanded dramatically in recent years. Impact investing is no longer limited to specific sectors or businesses but spans a wide array of industries, offering something for every type of investor. Whether it’s supporting an electric vehicle manufacturer, investing in a renewable energy company, or funding innovative small business lenders, the scope of impact investments has broadened significantly.

According to a 2020 report by the Global Impact Investing Network (GIIN), 87% of investors surveyed consider impact investing central to their mission. This highlights the growing recognition that sustainable investing is not only beneficial for society but also an essential component of a diversified portfolio. As impact investing becomes more mainstream, it has proven to be a powerful tool for achieving both financial and societal goals.

Impact Investments Can Yield Strong Returns

One of the common misconceptions about impact investing is that it requires a trade-off between making a positive impact and earning a return. Research has repeatedly shown that impact investments can provide returns comparable to, or even exceeding, traditional investments. A meta-study published in The Journal of Sustainable Finance in 2015 reviewed over 2,200 investment data points and found that more than 90% of studies showed that incorporating environmental, social, and governance (ESG) factors had a positive or neutral impact on returns.

Further studies, such as one conducted by Morgan Stanley in 2019, confirmed that sustainable funds delivered returns in line with traditional funds while also offering greater stability, especially during periods of market volatility. In fact, sustainable investments often prove more resilient, as demonstrated by the significant investments in the UK deep tech sector in 2020, which saw record-breaking funding despite a volatile market environment.

Tax Advantages of Impact Investing

For UK investors, the tax benefits associated with impact investing make it even more appealing. Government-backed schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide generous tax reliefs to encourage private investment in high-growth, impact-driven startups. These schemes not only offer the potential for significant financial returns but also allow investors to reduce their tax liabilities.

The EIS, introduced in 1994, offers investors up to 30% income tax relief, exemption from capital gains tax on gains made from qualifying shares, and inheritance tax relief. Additionally, investors can invest up to £2 million in knowledge-intensive companies, allowing them to support innovative businesses while maximizing their tax benefits.

The SEIS, a newer scheme launched in 2012, offers even more attractive tax reliefs, including 50% income tax relief, making it ideal for investors looking to back early-stage companies. Both the EIS and SEIS provide significant incentives for investors to contribute to impact-driven companies, fostering long-term growth while reducing tax burdens.

Building a Diversified Impact Investment Portfolio

As the landscape of impact investing continues to expand, it’s essential for investors to tailor their portfolios to their financial goals and values. Whether investing in early-stage tech companies through the EIS or in established impact-oriented private equity deals, there is a growing array of options that cater to various risk appetites and investment strategies.

Investors should assess the potential risks and rewards of each opportunity to ensure they align with their goals. For some, green bonds or other low-risk options may be appealing, while others may choose high-growth opportunities in the tech sector, where returns can be significant but come with higher risks.

Regardless of the approach, impact investing is becoming an increasingly important part of the modern investor’s toolkit. As the sector continues to grow, more and more investors are recognizing the benefits of combining financial returns with positive social and environmental outcomes.

Conclusion

Impact investing is no longer just a niche strategy for those seeking to do good; it’s a vital and growing part of the investment landscape that offers both financial returns and societal impact. With the availability of tax-efficient schemes like the EIS and SEIS, as well as the rising demand for sustainable and socially responsible investments, impact investing is playing an increasingly important role in the portfolios of experienced investors. This trend is expected to continue as more investors seek to align their portfolios with both their financial goals and their values.